Public sector banking firm Indian Overseas Bank (IOB) has obtained approval from the Reserve Bank (RBI) and the government to use its share premium money to offset its accumulated losses. IOB currently has about Rs.7,650 crore in its share premium account. This is the premium amount paid by its shareholders against the face value of the company’s share. The bank will use money from this account to offset its accumulated losses, which are now worth about Rs.6,979 crore.
By wiping off the accumulated losses, IOB looks forward to make a fresh start and position itself in a better way in the credit market. The bank, however, clarified that it is only using this money to strengthen the balance sheet rather than write off all its losses. Since this is a balance sheet action, the bank stated that this action will cause no change in its capital equity structure, net worth, or value of shares.
According to R Subramaniakumar, managing director and CEO of IOB, this action will strengthen the bank’s balance sheet. He also added that this move to offset accumulated losses could benefit all stakeholders of the bank. Currently, the government owns about 82% of the bank, LIC holds about 9%, and the rest is held by the public.
The bank has already obtained approvals from the RBI and the government. The bank’s board has also approved this move. The bank will hold a general meeting of shareholders on 30th January in order to gain their approval for this decision.
IOB is one of the many banks brought under the prompt corrective action (PCA) by the Reserve Bank. This action is the result of various factors like weak capital adequacy ratio, huge bad loans, etc. While this does not affect any regular banking activities, PCA forces banks to recover bad loans and imposes restrictions on providing new loans. This move to offset the losses could be seen as a way to improve the bank’s weak financial health.